How to Choose the Best Small Business 401K Provider

Who are the Best 401(k) Providers for Your Small Business?

Small business owners know that having a 401K plan can help increase employee satisfaction and save on personal and business taxes. In fact, employees who are offered a retirement plan are almost twice as likely to be satisfied with their company’s overall benefits package. However, choosing the right 401K provider for your small business can be a complicated, expensive, and confusing process. Therefore, we have decided to create this article, where we explain in a simple way everything you need to know about how to choose the best 401 K plan provider for small businesses.

Popular Myths About the 401K Plan

  • Myth: They are difficult to assemble and maintain.
  • Truth: While these plans can certainly be difficult to understand and strenuous to both create and maintain, small businesses now have more options. In recent years, 401 (k) providers have emerged doing the heavy lifting for employers, thus taking on most of the setup and administration responsibilities.
  • Myth: My employees will not participate.
  • Truth: If a 401K plan seems confusing to you, your employees may feel the same way. So choosing a modern 401 (k) with a user-friendly interface will make things easier for everyone.
  • Myth: They are for the big companies that can afford them.
  • Truth: Many 401 (k) providers now offer small business solutions at affordable prices. Additionally, the tax advantages for offering retirement plans to employees often offset some plan fees.
  • Myth: I can’t pay employer match contributions.
  • Truth: Not only do matching programs vary widely, they are optional. Even if your small business can’t afford a matching program, you can offer your employees a 401 (k) plan so they can contribute their own money.

What are some of the key responsibilities that 401K plan providers should offer?

  • Design and configuration of the plan. Document the plan, coordinate contributions with the payroll provider, and designate fiduciary responsibilities.
  • Enrollment and education. Explain the plan to employees, informing them of investment options and any changes.
  • Records management and maintenance. Deduct and deposit employee payroll contributions, make employer contributions, and keep a record of transactions.
  • Compliance and reporting. File IRS Form 5500 and complete compliance tests annually.
  • Investment Management. Choose a provider and a selection of investments. Make sure that all processes are carried out correctly.

Steps to choosing the best 401 (k) provider for your small business

1. Decide how involved you want to be.

No matter how seamless the employee experience seems, offering retirement benefits involves a lot of behind-the-scenes work. Of course, there are many challenges ahead, such as finalizing your plan design and deciding whether to offer both traditional and Roth 401 (k) contributions. But the biggest time commitment could involve daily maintenance, compliance, and reporting. Here are some of the main tasks that a 401 (k) plan administrator handles.

  • Preparation of a summary description of the plan for participants and beneficiaries
  • Participant Disclosure Documents and Account Statements
  • Approval of operations (for example, loans, distributions)
  • Compliance with plan rules and federal laws
  • Discrimination evidence and audit support
  • Employee Enrollment and Communications
  • Comply with the requirements of the IRS and the Department of Labor (for example, form 5500)

If that sounds like a full-time job, that’s because it is. Small businesses often turn to third-party administrators (TPAs) to handle these responsibilities on their behalf. Even TPAs vary widely in their scope, responsibilities, and accountability. For example, ERISA 3 (16) fiduciaries assume the duties of administration and responsibility for ensuring that your plan complies with the Employee Retirement Income Security Act. As if that wasn’t daunting enough, remember that there is more to managing a retirement plan than there is administration and compliance. Unless you want to manage the investment strategy of the plan yourself, you need an investment advisor and a manager.

2. Know the fees and rates

Retirement benefits come at a cost, not just for companies, but for their employees as well. Choosing the wrong 401K plan provider could take a bite out of participants’ savings. There are typically three different types of fees associated with offering retirement benefits: administration fees, investment fees, and individual service fees. If you’re looking for a metric that adds up how much your 401 (k) plan could cost employees, look no further than the total expense ratio. This is simply the percentage that participants are charged based on their participation. For example, an expense ratio of 1 percent means that an employee with $ 100,000 in his 401 (k) account would be charged $ 1,000 per year. When evaluating vendors, ask about their average expense ratios and other charges. So what is considered a fair share of market expenses? It depends on your size. Although it sounds counterintuitive, small businesses tend to have higher expense ratios. Companies with 50 employees have an average expense of 1.68 percent. By comparison, the average ratio for a company with 2,000 employees is 0.7 percent. Although those percentages sound small, they result in exponentially higher fees as businesses grow.

3. Ask about the features and options of the plan

There is no one-size-fits-all approach to saving for retirement. Employers have access to a variety of creative solutions to drive engagement and reward employees who save. Therefore, you want to make sure that the providers you consider can accommodate your needs. One of the first things you’ll want to confirm is whether the provider supports both traditional and Roth 401 (k) contributions. The difference between the two has to do with when the dollars are taxed. Employees with traditional 401 (k) accounts make their retirement contributions before taxes, and these amounts grow tax-free until they begin to withdraw funds. The thinking is that the tax brackets will be lower after retirement. In contrast, those with Roth 401 (k) accounts make their after-tax contributions. In this sense, this capital grows tax-free as long as they are maintained for at least five years. Although Roth contributions have a greater impact on employee paychecks, the arrangement is popular with younger workers as they have a longer trajectory toward retirement. The choice is the most important, any trusted seller should support both types of contributions. Safe Harbor 401 (k) plans are also worth considering. These special plans are exempt from certain compliance obligations but, in turn, require the company to contribute to employees’ 401 (k) accounts. Since both employer contribution and profit sharing are two great ways to boost participation, retain talent, and even save on taxes, the deal could be an easy task for your company. Just make sure the 401 (k) providers you are evaluating can actually accommodate Safe Harbor plans and matching agreements.

4. Prioritize the user experience

The management of retirement benefits should be easy for both your company and your employees. When considering your options, pay close attention to the user experience. Does the provider’s technology make it easy for participants to renew a previous retirement account? Do you give employees access to a single dashboard where they can check their balance, view transaction data, update contributions, and verify their employer’s contribution? The harder this information is to find, the less perceived value employees get from your retirement offer. Also, consider whether the provider has a mobile app or is enabled to offer mobile services, so employees can securely access their account information on the go. As intuitive as the software is, it’s a safe bet that employees will have retirement-related questions down the road. Your small business human resources team (if you have one) must be very congested, so don’t force them to add “retirement expert” to the list. You may want to work with vendors that combine their software with a service that caters to all of their users, including HR professionals and participants in the 401K plan program.

5. Question about payroll integrations

Payroll and retirement go hand in hand. When employees update their contributions, they trust that those amounts will be deposited into their retirement accounts after payday. In the past, for that to happen, HR had to manually enter deferrals into payroll. This approach is time consuming and prone to clerical errors. When considering 401 (k) providers, consider whether they have full 360 integration with your HR and payroll software. There are also benefits beyond streamlined contributions. If you want to automatically enroll new hires for a 401 (k) account, ask if provider integrations support that. Investing in a solution that keeps HR, payroll, and retirement in sync not only saves time and money, but also improves the overall employee experience.

Final thoughts

Evaluating the different 401K providers can be intimidating, which is why small businesses often put off the decision. But delaying it further can put yours at a competitive disadvantage, as job seekers increasingly view employer-sponsored retirement benefits as a must.

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